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Oil Slips From 2-Month High as China Commits to Zero-COVID Policy

By Ambar Warrick

Oil prices fell on Monday amid growing concerns over demand after major importer China reiterated its commitment to maintaining its economically disruptive zero-COVID policy, as it faces its worst outbreak in nearly six months.

Officials from China’s National Health Commission said over the weekend that the country will maintain its current policy on battling COVID-19, which entails strict movement curbs and potential lockdown measures to curb the spread of the virus.

The move dispels recent speculation over a potential pivot by China on the zero-COVID policy, which triggered a week-long rally in equity and commodity markets.

China’s zero-COVID policy ground economic activity in the country to a halt this year, severely denting its demand for oil as major economic hubs, including Shanghai, clamped down on travel.

The world’s largest oil importer is now facing a resurgence in infections, which saw the reintroduction of COVID curbs in several areas.

Fears of slowing demand in China weighed heavily on oil prices this year, pulling them off highs hit during the Russian invasion of Ukraine. Chinese trade data due later on Monday is expected to show a sustained decline in oil shipments to the country.

Brent oil futures fell 1.2% from a two-month high to $97.60 a barrel in early Asian trade, while West Texas Intermediate crude futures fell 1.3% to $91.47 a barrel. Both contracts rallied sharply last week on dovish signals from the Federal Reserve.

Four Fed officials said last week they support a smaller interest rate hike by the central bank in December, a move that offers some relief to risk-driven assets that were walloped by rising interest rates.

But given that the central bank recently signaled that interest rates will probably peak at higher levels than initially anticipated, markets are likely to remain under pressure in the medium-term.

Outside China, crude demand appears to be resilient in the U.S. and Europe. Oil prices rose last week after data showed a bigger-than-expected draw in weekly U.S. oil inventories.

Oil prices are also expected to be supported by tightening supply if Western price caps on Russian crude exports are passed, and as a supply cut by the Organization of Petroleum Exporting Countries goes into effect later this year.

The cartel recently signaled that it stands ready to support crude prices with more supply cuts if needed.

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